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October 15, 2007
Hurwicz, Maskin, and Myerson share Nobel
Here is the press release from the Nobel Foundation:
Adam Smith's classical metaphor of the invisible hand refers to how the market, under ideal conditions, ensures an efficient allocation of scarce resources. But in practice conditions are usually not ideal; for example, competition is not completely free, consumers are not perfectly informed and privately desirable production and consumption may generate social costs and benefits. Furthermore, many transactions do not take place in open markets but within firms, in bargaining between individuals or interest groups and under a host of other institutional arrangements. How well do different such institutions, or allocation mechanisms, perform? What is the optimal mechanism to reach a certain goal, such as social welfare or private profit? Is government regulation called for, and if so, how is it best designed?
These questions are difficult, particularly since information about individual preferences and available production technologies is usually dispersed among many actors who may use their private information to further their own interests. Mechanism design theory, initiated by Leonid Hurwicz and further developed by Eric Maskin and Roger Myerson, has greatly enhanced our understanding of the properties of optimal allocation mechanisms in such situations, accounting for individuals' incentives and private information. The theory allows us to distinguish situations in which markets work well from those in which they do not. It has helped economists identify efficient trading mechanisms, regulation schemes and voting procedures. Today, mechanism design theory plays a central role in many areas of economics and parts of political science.
Here is the scientific background paper. Arnold Kling calls it a "Nobel Prize in abstraction". Marginal Revolution provides a translation as well as links about Leonid Hurwicz, Roger Myerson, and Eric Maskin. Mark Thoma lists some other media links as well.
In this post, Tyler Cowen muses about the practicality of their research, asking "Did these guys get at the real reasons why we don't organize the entire economy as a second-price auction?" That's a fair question. But the seminal contributions of these three to the theory of mechanism design are already central to the study of auctions, regulation, and social choice. Those are precisely the sort of things that the Nobel Committee likes to reward. For laying the foundations of this work, Hurwicz was a great choice. Maskin and Myerson are a little on the young side for an economics Nobel, but very appropriate choices to complement Hurwicz.
After hearing about this, I was having flashbacks to my Ph.D. micro courses all morning. Despite what you might think, that's not entirely a bad thing. I remember well the days and nights I spent poring over the work of these three prize winners. I learned a lot from their papers, and I'm happy to see them get the prize.
Posted by William Polley at October 15, 2007 12:01 PM
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Comments
these guys were brilliant. next year they need to give Dr. Eugene Fama his due.
Posted by: jeff at October 16, 2007 09:49 PM